The U.S. dollar eased on Wednesday as traders exercised caution ahead of a key U.S. consumer price report, while sterling slipped following a mild inflation reading in the UK.
At 04:45 ET (09:45 GMT), the Dollar Index, which measures the greenback against a basket of six major currencies, fell 0.2% to 108.895, retreating from the more than two-year high reached earlier in the week.
Dollar Pulls Back from Highs
The dollar’s slight retreat followed softer-than-expected U.S. producer price data on Tuesday, which also drove Treasury yields lower. Investors are now focused on the U.S. consumer inflation report due later in the session, which could offer further insight into inflation trends.
Economists predict the headline CPI for December rose by 0.4% month-on-month, slightly faster than November’s 0.3%. On a year-over-year basis, CPI is expected to increase to 2.9% from 2.7%. Excluding volatile items like food and energy, core CPI is projected to rise by 0.3% monthly and 3.3% annually, matching November’s figures.
Concerns over persistent inflation remain, particularly after last week’s strong employment data. Additionally, President-elect Donald Trump’s plans to impose broad tariffs on both allies and adversaries have raised fears of further price pressures.
“Markets are factoring in the possibility of U.S. protectionism but not an abrupt implementation of sweeping tariffs. Even a gradual increase in tariffs could leave markets less optimistic than Trump’s team about controlling inflation. A hotter-than-expected CPI reading today could heighten investor concerns about inflation before any tariff measures are introduced,” analysts at ING noted.
Sterling Stable Despite Soft CPI Data
In Europe, GBP/USD held steady at 1.2221, just above Monday’s low—the weakest level since November 2023—despite data showing a sharper-than-expected slowdown in UK inflation.
The annual inflation rate fell to 2.5% in December from 2.6% in November, according to the Office for National Statistics.
This unexpected decline in inflation increased market expectations for a Bank of England rate cut in February, with an 82% probability of a quarter-point reduction now priced in. The market has also factored in two rate cuts for 2025, up from a 60% likelihood before the data release.
The pound has faced challenges this year as surging gilt yields, leading to higher borrowing costs, have raised concerns about fiscal constraints under the new Labour government. These pressures could force policymakers to scale back spending or raise taxes, potentially hindering future growth.
“Normally, the pound would have weakened significantly after a soft inflation report, but it has remained flat. This reflects its current behavior resembling that of an emerging market currency, reacting more to long-term borrowing costs than short-term central bank policy shifts,” analysts at ING commented.
Euro Gains Slightly Ahead of US CPI
EUR/USD edged up to 1.0312, supported by subdued French inflation data for December.
“USD-negative events from yesterday pushed EUR/USD back to 1.030, but we anticipate the U.S. CPI release will resume pressure on the pair. The eurozone calendar lacks significant market-moving events, although ECB officials Lane, Guindos, Villeroy, and Vujcic are scheduled to speak,” ING added.
Euro Struggles Amid Growth Concerns and Tariff Risks
The euro has faced a challenging start to the year as concerns over weak economic growth in the region and potential tariff threats weigh on investor sentiment.
The European Central Bank is widely expected to lower interest rates by approximately 100 basis points in 2025, with most of the reductions anticipated in the first half of the year.
Yen Strengthens on BOJ Signals
In Asia, USD/JPY fell 0.7% to 156.86 as the yen gained strength following remarks from Japan’s central bank leadership.
Bank of Japan Governor Kazuo Ueda signaled that the central bank would consider raising interest rates and adjusting monetary policy if economic and price conditions continue to improve.
His comments follow Deputy Governor Ryozo Himino’s statement a day earlier, suggesting the BOJ will discuss a potential rate hike at its upcoming policy meeting.
Meanwhile, USD/CNY remained steady at 7.3318, near a 16-month high, as markets await the People’s Bank of China’s decision on its benchmark loan prime rate later this week.
